Question

A 20-year loan of 150,000 is negotiated with the borrower agreeing to repay principal and interest at 5%. A level payment of 9,000 will apply during the first ten years and a higher level payment will apply during the remaining ten years. Each time the lender receives a payment from the borrower, he will deposit the portion representing the principal into a sinking fund with an annual effective interest rate of 4%. (Assume that the interest portion remains level throughout these 20 years and assume that all but the interest portion is deposited into the sinking fund.) This scheme will replace the lender’s capital.

What is the higher payment (rounded to the nearest dollar) that applies during the years 11-20?


A. 16,982  
B. 13,306  
C. 16,426  
D. The answer is not listed here

E. 13,900

Find the lender’s yield on this investment.


A. . 0479  
B. .0384  
C. .0784  
D. .0704  
E. The answer is not listed here

Answer 1

Outstanding principal at the end of 10 year=$131133.16. calculation given below:

Now, at the end of year 20, FV=0, rate=5%, nper=10,PV=131133.16, pmt=?

Hence, the higher payment amount is $16982.34

Option A is correct.

Value of sinking fund at the end of 20 year is 363839.59. Calculation is given below:

Yield of the lender is 4.53%. Calculation is given below:

Hence, lender's yield is 4.53%. None of the given option is correct.

Option E is correct.